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Beneficiaries, Foreign trusts, Trusts

Changes to taxation of land not limited to New Zealand

The following article by Michael Parker, Andrew O’Bryan, Frank Hinoporos, Emma Woolley and William Moore from Hall & Wilcox highlights the importance of knowing who the trustees and beneficiaries of Australian trusts are.  While the duty applies in an Australian context it can have relevance to New Zealanders who may be looking at purchasing real estate in Australia through a trust, or who might “taint” an Australian family trust by virtue of their being non-resident beneficiaries of a trust.

Caution need when buying property in trusts

In an alarming move, the Victorian State Revenue Office has confirmed our fear that Foreign Purchaser Additional Duty (FPAD) will be applied to many stock-standard discretionary trusts. This will result in trust acquisitions of Victorian residential property being exposed to an additional 3% of duty. Trust deeds should be reviewed and possibly amended prior to acquiring a property.

What is FPAD?

Recent amendments to Victoria’s Duties Act have imposed an additional amount of duty of 3% on certain post 1 July 2015 acquisitions of land by foreign purchasers.

The additional duty is payable on acquisitions of existing residential premises by a foreign purchaser. Also, the additional duty is imposed where a foreign purchaser acquires land (other than existing residential property) and they form an intention to build a residence on that land.

Upon forming that intention, the purchaser must notify the SRO within 14 days. They must then pay an amount of additional duty of 3% of the value of the land (measured at the time of acquisition) within 30 days of forming the intention.

The additional duty also extends to purchases of certain landholder companies and trusts.

Application to discretionary trusts

The definition of a foreign purchaser includes the trustee of a foreign trust. In our view, this will encompass a large percentage of discretionary trusts.

A foreign trust means a trust in which one of the following has a “substantial interest in the trust estate”:

  1. a) a foreign trust means a trust in which one of the following has a “substantial interest in the trust estate”
  2. b) a foreign natural person, and
  3. c) another person that holds the substantial interest as trustee of another foreign trust.

A foreign natural person is broadly a natural person who is not an Australian citizen or certain visa holders.

The amendments go on to provide a definition of what constitutes a “substantial interest in a trust estate”. Relevantly for discretionary trusts, the amendments state:

“If, under the terms of a foreign trust, a trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or a member of a class of person, any such person is taken to have a beneficial interest in the maximum percentage of the capital of the foreign trust estate that the trustee is empowered to distribute to that person.”

What this means is that if, as is so often the case, the trust deed provides:

  • an extensive definition of the class of beneficiaries, and
  • the trustee with broad discretion as to who may receive distributions of capital.

It is likely that there will be a foreign natural person with a substantial interest in the trust estate. This will make the trust a foreign trust.

For instance, the standard Hall & Wilcox discretionary trust deed includes a broad definition of the beneficiary class which extends to:

“the parents, grandparents, brothers, sisters, Spouses, uncles, aunts and Children of the Primary Beneficiary or the Primary Beneficiaries, the Spouses, Children and grandchildren of those parents, grandparents, brothers and sisters, the Spouses, Children, grandchildren and great grandchildren of the Children of the Primary Beneficiary or the Primary Beneficiaries and the Children and grandchildren of the Spouses of the Primary Beneficiary or Primary Beneficiaries”.

In modern multi-cultural Australia, we believe most families will have at least someone within this class who is a foreign natural person. As such, we believe most discretionary trusts will be foreign trusts and subject to the extra 3% duty.

What should be done

Prior to acquiring land in a discretionary trust, where the land contains existing residential premises or it is intended to build residential premises, the deed should be reviewed to see if the trust is a foreign trust.

Advice should be sought about whether it is possible to either amend the terms of an existing trust or prepare a bespoke trust deed that ensures it is not a foreign trust. In addition, for existing trusts resettlement issues must be considered before making any amendments.

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